Consolidated Cash Flow Statement

Transcription

1 Consolidated Cash Flow Statement For the Financial 30 September 2016 Notes Cash flows from operating activities Profit after taxation 8,722 33,782 Depreciation of property, plant and equipment 14 30,752 30,819 Amortisation of grant 17 (3,072) (3,072) Impairment of goodwill and intangible assets 12 7,116 7,925 Interest and other income (423) (300) Finance costs 18,677 19,548 Retirement benefit cost 7,210 6,080 Unrealised foreign exchange loss/(gain) 5,286 (3,003) Income tax (credit)/expense (866) 6,931 Pension contributions paid (5,921) (6,753) Operating cash flows before movements in working capital 67,481 91,957 Movements in working capital Increase in trade and other receivables (15,508) (13,462) Increase in trade and other payables 31,657 80,806 Cash generated from operations 83, ,301 Income taxes paid (2,466) (3,537) Interest received Net cash generated from operating activities 81, ,064 Cash flows from investing activities Purchase of property, plant and equipment (32,231) (22,867) Net cash used in investing activities (32,231) (22,867) Cash flows from financing activities Dividends paid (3,500) (3,000) Borrowings repaid (13,545) (17,437) Finance costs paid (18,707) (19,548) Net cash used in financing activities (35,752) (39,985) Net increase in cash and cash equivalents 13,604 93,212 Cash and cash equivalents at start of year 270, ,131 Effect of foreign exchange on cash and cash equivalents (1,726) 34 Cash and cash equivalents at end of year , ,377 EirGrid plc Annual Report 2016 Page 77

2 Company Cash Flow Statement For the Financial 30 September 2016 Notes Cash flows from operating activities Profit after taxation 23,022 41,685 Depreciation of property, plant and equipment 14 10,621 11,292 Interest and other income (731) (1,051) Finance costs 3,607 4,065 Retirement benefit cost 6,189 5,859 Unrealised foreign exchange loss/(gain) 5,637 (3,095) Income tax credit (876) (32) Pension contributions paid (4,474) (4,432) 42,995 54,291 Movements in working capital (Increase)/decrease in trade and other receivables (37,531) 1,621 Increase in trade and other payables 38,198 67,580 Cash generated from operations 43, ,492 Income taxes paid (1,240) (1,907) Interest received 736 1,080 Net cash generated from operating activities 43, ,665 Cash flows from investing activities Purchase of property, plant and equipment (23,326) (14,482) Net cash used in investing activities (23,326) (14,482) Cash flows from financing activities Dividends Paid (3,500) (3,000) Proceeds from borrowings - - Borrowings repaid (8,044) (7,726) Finance costs paid (3,607) (4,055) Net cash used in financing activities (15,151) (14,781) Net increase in cash and cash equivalents 4,681 93,402 Cash and cash equivalents at start of year 224, ,240 Cash and cash equivalents at end of year , ,642 EirGrid plc Annual Report 2016 Page 78

3 Notes To The Financial Statements 1. General Information EirGrid plc ( the Company ) is a public limited company, incorporated in Ireland, established pursuant to S.I. No 445 of 2000 European Communities (Internal Market in Electricity) Regulations, The Company is licensed by the Commission for Energy Regulation as the Transmission System Operator (TSO) in Ireland and as Market Operator (MO) for the wholesale electricity market on the island of Ireland. SONI Limited (a subsidiary of EirGrid plc) is licensed by the Northern Ireland Authority for Utility Regulation as the TSO in Northern Ireland and also holds an MO licence for the island of Ireland. EirGrid Interconnector Designated Activity Company (a subsidiary of EirGrid plc) is licensed by the Commission for Energy Regulation and the Office of the Gas and Electricity Markets (Ofgem) as the operator of the East-West Interconnector. The registered office of EirGrid plc is The Oval, 160 Shelbourne Road, Ballsbridge, Dublin Statement of Accounting Policies Basis of preparation The Group and Company Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. They are prepared on the basis of all IFRSs and Interpretations that are mandatory for financial year ended 30 September 2016 and in accordance with the Irish Companies Act The Directors are confident, on the basis of current financial projections and facilities available, that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, the Directors continue to adopt the going concern basis in preparing the Financial Statements. The Financial Statements have been presented in Euro, the currency of the primary economic environment in which the Group and Company operate and have been prepared on a historical cost basis, except for the revaluation of certain financial instruments which are held at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The preparation of Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. The accounting policies set out below have been consistently applied to all periods presented in these Financial Statements. The current period being reported on is the financial year to 30 September The comparative figures are for the financial year ended 30 September Adoption of new standards In the current financial year, the following new and revised standards and interpretations have been adopted and have affected the amounts reported in these financial statements (for annual financial years beginning on or after): IAS 19 Employee Benefits (Amendments) - (Effective 1 February 2015) At the date of authorisation of these Financial Statements, the following Standards and Interpretations which have not been applied in these Financial Statements were in issue but not yet effective for the accounting period reported on: IFRS 10 Consolidated Financial Statements (Amendments) - (Effective 1 January 2016) IFRS 11 Accounting for Acquisitions of Interests in Joint Operations (Amendments) - (Effective 1 January 2016) IFRS 12 Disclosure of interest in other entities (Amendments) - (Effective 1 January 2016) IAS 1 Presentation of Financial Statements (Amendments) - (Effective 1 January 2016) EirGrid plc Annual Report 2016 Page 79

4 2. Statement of Accounting Policies (continued) IAS 16 Property, Plant and Equipment (Amendments) - (Effective 1 January 2016) IAS 27 Separate Financial Statements (Amendments) - (Effective 1 January 2016) IAS 28 Investment in Associates and Joint Ventures (Amendments) - (Effective 1 January 2016) IAS 38 Intangible Assets (Amendments) - (Effective 1 January 2016) IAS 7 Statement of Cash Flows (Amendments) - (Effective 1 January 2017) IAS 12 Income Taxes (Amendments) - (Effective 1 January 2017) IFRS 9 Financial Instruments - (Effective 1 January 2018) IFRS 15 Revenue from contracts with customers - (Effective 1 January 2018) The Directors are currently assessing the impact of these Standards and Interpretations on the Financial Statements. Basis of consolidation The Consolidated Financial Statements incorporate the Financial Statements of the Company and entities controlled by the Company (its subsidiaries) made up to 30 September each year. Control is achieved when the Company: has the power over the investee; is exposed, or has rights, to variable return from its involvement with the investee; and has the ability to use its power to affect its return. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company s voting rights in an investee are sufficient to give it power, including: the size of the Company s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Company, other vote holders or other parties; rights arising from other contractual arrangements; and any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company losses control of the subsidiary. Specifically, the results acquired or disposed of during the financial year are included in the consolidated income statement from the date the Company gains control until the date when the Company ceases to control the subsidiary. EirGrid plc Annual Report 2016 Page 80

5 2. Statement of Accounting Policies (continued) Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Group s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cashflows relating to transactions between the members of the Group are eliminated on consolidation. Changes in the Group s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amount of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company. When the Group loses control of a subsidiary, the gain or loss on disposal recognised in profit or loss is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRS). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the costs on initial recognition of an investment in an associate or jointly controlled entity. Joint operations The Financial Statements incorporate the results of the Company, together with its share of the results and assets and liabilities of the joint operation which it participates, using the proportionate consolidation method as permitted under IFRS 11. As the joint operation is a joint arrangement whereby the parties have joint control of the arrangement, have rights to the assets and obligations for the liabilities relating to the arrangement, the directors recognise their assets, liabilities, revenue and expenses in relation to its interest in a joint operation. The Company s share of results and net assets of joint operations, are accounted for on the basis of proportionate consolidation from the date on which the contractual agreements stipulating joint control are finalised, and derecognised when joint control ceases. The Company combines its share of the joint arrangements, individual income and expenses, assets and liabilities and cash flows on a line by line basis with similar items in the company s financial statements. Business combinations Business combinations from 1 April 2010 are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs are expensed as incurred. EirGrid plc Annual Report 2016 Page 81

6 2. Statement of Accounting Policies (continued) When the Group acquires a business it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the Group s previously held equity interest in the acquiree is re-measured to fair value at the date the Group first acquires control through the Income Statement. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of contingent consideration which is deemed to be a financial asset or a financial liability will be recognised in accordance with IAS 39 in the Income Statement. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. Business combinations prior to 1 April 2010 were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree s identifiable net assets. Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill. Contingent consideration was recognised if the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognised as part of goodwill. Goodwill Goodwill on acquisitions is initially measured at cost being the excess of the cost of the business combination over the acquirer s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Goodwill acquired in a business combination is allocated, from the acquisition date, to the cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The goodwill impairment tests are undertaken at the same time each financial year. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit is less than the carrying amount, an impairment loss is recognised. Impairment losses arising in respect of goodwill are not reversed following recognition. Where a subsidiary is sold, any goodwill arising on acquisition, net of any impairments, is included in determining the profit or loss arising on disposal. Where goodwill forms part of a cash-generating unit and part of the operations within that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the proportion of the cashgenerating unit retained. EirGrid plc Annual Report 2016 Page 82

7 2. Statement of Accounting Policies (continued) Revenue Revenue primarily represents the income derived from the provision of electricity transmission, sale of capacity on the East-West Interconnector and Market Operator services to customers during the financial year and excludes value added tax. Revenue includes the regulatory allowance received for the management of transmission constraint costs. Revenue, from 1 October 2012, includes the regulatory allowance received in respect of the debt service cost and operation costs of the EWIC. Tariff revenue is recognised when receivable from customers, based on metering data. Revenue also includes Countertrading receipts in relation to trading across the East-West and Moyle Interconnectors. Countertrading facilitates the dispatch of renewable generation in line with EU regulations and reduces the cost of managing transmission constraints. Where revenue received or receivable exceeds the maximum amount permitted by regulatory agreements and adjustments will be made to future prices to reflect the over-recovery, no liability is recognised. Similarly no asset is recognised where a regulatory agreement permits adjustments to be made to future prices in respect of an under-recovery. However, in the circumstances of a fundamental change in market design, where revenue received or receivable exceeds the maximum amount permitted by regulatory agreements and adjustments will be made to future prices to reflect this over-recovery, a liability will be recognised. As Market Operator for the Single Electricity Market, the Group does not act on its own account in the sale or purchase of electricity. It does not take title to the electricity, nor is it exposed to credit risk on sale. Consequently the Group does not recognise as revenue monies derived from the sale of electricity. The payables and receivables associated with electricity trading are recognised in the Balance Sheet. Monies received from tariffs that are subject to regulatory determination are recognised as income. Unbilled income represents income from electricity transmission services which, in compliance with the regulatory timetable, has not been billed. Unbilled income is recognised on an accruals basis and is stated net of value added tax. Direct costs Direct costs primarily represents the costs associated with the provision of electricity transmission services to customers during the financial year and excludes value added tax. Direct costs include transmission asset owner charges, transmission system constraint costs, ancillary services and interruptible load. Direct costs are recognised as they are incurred. Operating profit The Group has adopted an Income Statement format which seeks to highlight significant items within the results for the period. Accordingly, operating profit is stated after charging direct costs and after other operating costs but before interest income and finance costs. Other operating costs primarily represents employee costs, professional fees, contractors and establishment costs. Other operating costs are recognised as they are incurred. Leases Leases are recognised from the date from which the lessee is entitled to exercise its right to use the leased asset. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. EirGrid plc Annual Report 2016 Page 83

8 2. Statement of Accounting Policies (continued) Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern of the user s benefit. Benefits receivable as an incentive to enter into an operating lease are spread on a straight-line basis over the lease term. Foreign currencies The individual Financial Statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the Consolidated Financial Statements, the results and financial position of each Group entity are expressed in Euro, which is the functional currency of the Company and the presentation currency for the Consolidated Financial Statements. Transactions in foreign currencies are recorded at the rates of exchange prevailing at the dates of the transactions. At each Balance Sheet date, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates prevailing at that date, with exchange differences arising recognised in the Consolidated Income Statement as they occur. On consolidation, the Income Statements of the Group s two foreign currency subsidiaries are translated into Euro at the average exchange rate. The Balance Sheets of these subsidiaries are translated at rates of exchange ruling at the Balance Sheet date. Resulting exchange differences arising from the translation of the Group s foreign currency subsidiaries are taken directly to a separate component of shareholders equity. Goodwill and fair value adjustments arising on the acquisition of the foreign subsidiaries are treated as assets and liabilities of the foreign subsidiaries and are translated at the closing rate. Retirement benefit costs For defined benefit plans, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each Balance Sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside profit or loss and presented in the Statement of Comprehensive Income. The retirement benefits obligations recognised in the Balance Sheet represent the present value of the defined benefit obligations reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. The retirement benefit current service costs for employees engaged on capital projects are capitalised in the Balance Sheet as the costs are incurred. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the financial year. Taxable profit differs from profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the Financial Statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill. EirGrid plc Annual Report 2016 Page 84

9 2. Statement of Accounting Policies (continued) Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance Sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited to other comprehensive income or directly to equity, in which case the deferred tax is also dealt with in other comprehensive income or equity as appropriate. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses, except for land which is shown at cost less impairment. Depreciation is recognised so as to write off the cost of assets over their estimated useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each period end, with the effect of any changes in estimate accounted for on a prospective basis. The depreciation periods for the principal categories of property, plant and equipment are as follows: Leasehold building improvements: over the period of the lease; Freehold buildings and improvements: 5 to 15 years; Fixtures and fittings: 5 years; IT, telecommunications equipment and other: 3 to 8 years; and Single Electricity Market asset: 5 years. The depreciation periods for the East-West Interconnector category within property, plant and equipment are as follows: Cables: 40 years; Converter stations, warehouse and equipment: 30 years; Foreshore licences: 30 years; Spare transformer and spare parts: 30 years; and Marine Survey: 3 years. No depreciation is provided on freehold land or on assets in the course of construction. The Single Electricity Market asset is the central IT system used to settle and administer the wholesale electricity market in the island of Ireland. Assets in the course of construction are carried at cost less any recognised impairment loss. Costs include professional fees, wages and salaries, retirement benefit costs and any other costs incurred directly attributable to the construction of such assets. These assets are reclassified to an appropriate category and depreciation of these assets commences when the assets are ready for their intended use. EirGrid plc Annual Report 2016 Page 85

10 2. Statement of Accounting Policies (continued) The gain or loss arising on the disposal or retirement of property, plant and equipment is determined as the difference between the net sales proceeds and the carrying amount of the asset and is recognised in the Income Statement. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Where variable rate borrowings are used to finance a qualifying asset and are hedged in an effective cash flow hedge of interest rate risk, the interest added to the cost of the qualifying asset is the net interest expense after the effect of hedging. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Intangible assets Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, these assets are reported at cost less accumulated amortisation and accumulated impairment losses. Where the intangible assets have a finite useful estimated life, amortisation is charged on a straight-line basis over their useful estimated lives. The Directors are of the view that TSO and MO licence agreements for Northern Ireland have indefinite lives. The following key factors were considered in determining the useful lives of the above licence agreements; expected usage, typical product life cycles of similar assets used in a similar way, stability of the industry in which the asset is operated, period of control over the asset and expiry dates of licence agreements. It is unlikely that the above licences will be cancelled and as the licences are open-ended and renewable and there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group, an indefinite life assumption is reasonable. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Impairment of assets At each Balance Sheet date, the Group reviews the carrying amounts of its intangible assets and property, plant and equipment to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified. EirGrid plc Annual Report 2016 Page 86

11 2. Statement of Accounting Policies (continued) Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognised immediately in the Income Statement, unless the relevant asset or CGU is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Grants Grants of a capital nature are accounted for as deferred income in the Balance Sheet and are released to profit or loss over the expected useful lives of the assets concerned. Grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Financial assets and liabilities Financial assets and liabilities are recognised on the Balance Sheet when the Group becomes a party to the contractual provisions of an instrument. Trade receivables are measured at initial recognition at invoice value, which approximates to fair value, and subsequently carried at amortised cost. Financial assets and liabilities are derecognised from the Balance Sheet when the Group ceases to be a party to the contractual provisions of the instrument. Where market participants have entered into Settlement Reallocation Agreements the related receivables and payables are stated net, as there is an intention to settle these simultaneously on a net basis under the trading and settlement code. Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Trade payables are measured at initial recognition at invoice value, which approximates to fair value and subsequently carried at amortised cost. Derivative financial instruments The Group enters into interest rate swaps to manage its exposure to interest rate risk. Further details of derivative financial instruments are disclosed in note 27. Derivative financial instruments are initially recognised at fair value at the date the derivative contract is entered into and are subsequently re-measured to their fair value at each Balance Sheet date. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using discount factors interpolated from the interest rate curves at the reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. EirGrid plc Annual Report 2016 Page 87

12 2. Statement of Accounting Policies (continued) Hedging instruments The Group designates its interest rate swaps as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in cash flows of the hedged item. The effective portion of changes in the fair value of interest rate swaps that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in finance costs in the Income Statement. Amounts accumulated in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss, on the same line of the Income Statement as the recognised hedged item, or is included as a base adjustment to a non-financial hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Note 27 sets out details of the fair values of the Group s current interest rate swaps used for hedging purposes. Movements in the hedging reserve in equity are also detailed in the Statement of Comprehensive Income. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are initially recognised at fair value, which equates to the value of proceeds received net of any directly attributable arrangement costs. Subsequent to initial recognition these borrowings are stated at amortised cost using the effective interest rate method. Finance income and costs Interest income is earned on bank deposits and is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial asset to that asset s carrying value. Income is also earned through the charging of inflation adjusted interest on deferred costs in respect of transmission projects. Finance costs comprise interest on borrowings and related interest rate swaps. Finance costs are recognised as an expense in the period in which they are incurred, except where finance costs are directly attributable to the acquisition, construction or production of qualifying assets, in which case they would be accounted for as borrowing costs. Finance costs are calculated using the effective interest rate method, a method of calculating the amortised cost of a financial liability and allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability. EirGrid plc Annual Report 2016 Page 88

13 2. Statement of Accounting Policies (continued) Critical accounting judgements and key sources of estimation uncertainty The preparation of Financial Statements requires management to make estimates and assumptions about the carrying amounts reported for assets and liabilities as at the Balance Sheet date and the amounts reported for revenue and expenses during the period that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. The nature of estimation means that actual outcomes could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Key sources of estimation and uncertainty and critical accounting judgements are as follows: Useful lives of property, plant and equipment The depreciation charge for property, plant and equipment depends primarily on the estimated lives of each type of asset and, in certain circumstances, estimates of residual value. The useful lives of assets are determined by management at the time the assets are acquired and are reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. Historically, changes in useful lives have not resulted in material changes to the Group s depreciation charge. Retirement benefits obligations The Group operates two defined benefit pension plans. The actuarial valuation of the pension plan liabilities are based on various financial and demographic assumptions about the future including discount rates, inflation, salary increases, pension increases and mortality rates. The Group s obligation in respect of the plans are calculated by independent qualified actuaries and are updated at least annually. The obligation at 30 September 2016 is 196.0m (2015: 156.9m) and the fair value of plan assets is 142.1m (2015: 129.7m). This gives a net pension deficit, before deferred tax, of 53.9m (2015: 27.2m). Deferred tax Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which any unused tax losses and unused tax credits can be utilised. The Group estimates the most probable amount of future taxable profits, using assumptions consistent with those employed in impairment calculations. These calculations require the use of estimates. The deferred tax asset at 30 September 2016 was 24.4m (2015: deferred tax asset of 17.0m). The deferred tax liability at 30 September 2016 was 17.4m (2015: deferred tax liability of 16.6m). Intangible assets The Group tests annually whether its goodwill and licence agreement assets have suffered any impairment. The recoverable amount of the intangible assets allocated to a Cash Generating Unit (CGU) has been determined by value in use calculations, which use budgets and forecasts covering the period to 30 September 2021 and are sensitive to the finalisation of price control determinations with regulatory authorities. These calculations require the use of estimates and assumptions, which are discussed in detail in note 12. Intangible assets at 30 September 2016 were 2.2m (2015: 10.2m). EirGrid plc Annual Report 2016 Page 89

14 3. Segment Information An operating segment is a component of the entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Board, the entity s chief operating decision maker, to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. The Group is analysed into four main reportable segments for internal reporting purposes: EirGrid Transmission System Operator ( EirGrid TSO ), which derives its revenue from providing services as the TSO in Ireland and is regulated by the Commission for Energy Regulation. Trading in EirGrid Telecoms Designated Activity Company, the company that manages the license of the commercial fibre optic cable built as part of the East-West Interconnector project, has been included in the EirGrid TSO segment due to its relative size. Single Electricity Market Operator ( SEMO ), which derives its revenue from acting as the Market Operator for the wholesale electricity market on the island of Ireland. SONI Transmission System Operator ( SONI TSO ), which is licensed by the Utility Regulator Northern Ireland (URegNI) and derives its revenue from acting as the TSO in Northern Ireland. Trading in EirGrid UK Holdings Limited, the holding company of the SONI subsidiary, has been included in the SONI segment. Operation and the ownership of East-West Interconnector ( EWIC ), being the link between the electricity grids of Ireland and Britain. EirGrid plc Annual Report 2016 Page 90

15 3. Segment Information (continued) The segment results for the financial year ended 30 September 2016 are as follows: EirGrid SONI Notes TSO SEMO TSO EWIC Eliminations Total Income Statement items Segment revenue 374, , ,509 42,679 (33,174) 672,616 Direct costs (304,945) (153,641) (102,035) - 33,174 (527,447) Gross profit 69,163 15,853 17,474 42, ,169 Operating costs (51,023) (7,948) (16,729) (8,563) - (84,263) Depreciation (net of amortisation) (6,916) (4,958) (2,598) (13,208) - (27,680) Impairment - - (7,116) - - (7,116) Total other operating costs (57,939) (12,906) (26,443) (21,771) - (119,059) Operating profit/(loss) 11,224 2,947 (8,969) 20,908-26,110 Interest and other income 423 Finance costs (18,677) Profit before taxation 7,856 Income tax credit 866 Profit for the year 8,722 Balance Sheet items Segment assets 363, ,840 40, ,612-1,069,963 Goodwill and intangible assets 12 2,159 Total assets as reported in the Consolidated Balance Sheet 1,072,122 Segment liabilities 527, ,690 24, , ,620 Total liabilities as reported in the Consolidated Balance Sheet 926,620 EirGrid plc Annual Report 2016 Page 91

16 3. Segment Information (continued) The comparative segment results for the financial year ended 30 September 2015 are as follows: EirGrid SONI Notes TSO SEMO TSO EWIC Eliminations Total Income Statement items Segment revenue 355, , ,413 70,755 (33,783) 706,177 Direct costs (297,763) (186,619) (84,449) - 33,783 (535,048) Gross profit 57,775 11,635 30,964 70, ,129 Operating costs (44,893) (7,936) (15,270) (7,397) - (75,496) Depreciation (net of amortisation) (7,329) (5,390) (2,691) (12,337) - (27,747) Impairment - - (7,925) - - (7,925) Other operating costs (52,222) (13,326) (25,886) (19,734) - (111,168) Operating profit/(loss) 5,553 (1,691) 5,078 51,021-59,961 Interest and other income 300 Finance costs (19,548) Profit before taxation 40,713 Income tax expense (6,931) Profit for the year 33,782 Balance Sheet items Segment assets 326, ,857 30, ,625-1,033,250 Goodwill and intangible assets 12 10,165 Total assets as reported in the Consolidated Balance Sheet 1,043,415 Segment liabilities 465, ,302 21, , ,077 Total liabilities as reported in the Consolidated Balance Sheet 864,077 EirGrid plc Annual Report 2016 Page 92

17 3. Segment Information (continued) Geographical information Revenue Non-current assets Ireland 510, , , ,089 UK 161, ,976 22,305 28,951 Total 672, , , ,040 Information about major customers Included in EirGrid TSO segment revenues of 374.1m for the financial year to 30 September 2016 (2015: 355.5m) are revenues of approximately 170.8m (2015: 168.4m), 59.7m (2015: 63.3m), 45.8m (2015: 46.9m) and 34.6m (2015: 33.0m) which arose from sales to the segment s four largest customers. Included in SEMO segment revenues of 169.5m for the financial year to 30 September 2016 (2015: 198.3m) are revenues of approximately 65.0m (2015: 74.4m), 35.5m (2015: 45.6m), 34.1m (2015: 43.4m) and 14.2m (2015: 15.5m) which arose from sales to the segment s four largest customers. Included in SONI TSO segment revenues of 119.5m for the financial year to 30 September 2016 (2015: 115.4m) are revenues of approximately 47.7m (2015: 49.0m), 30.0m (2015: 30.1m), 20.4m (2015: 10.5m) and 12.0m (2015: 14.2m) which arose from sales to the segment s four largest customers. 4. Employees The average number of persons employed by the Group during the year to 30 September 2016 was 373 (2015: 398), excluding staff engaged on capital projects. The average number of persons engaged on capital projects during the year to 30 September 2016 was 107 (2015: 82). The staff costs associated with these employees have been capitalised and totalled 10.4m for the year to 30 September 2016 (2015: 8.8m). Average number of persons employed on a monthly basis by business activity: Number Number EirGrid TSO SONI TSO SEMO EWIC 6 6 Capital projects Total EirGrid plc Annual Report 2016 Page 93

18 4. Employees (continued) Total remuneration including the Executive Director s salary, comprised: Group Company Wages and salaries 36,746 36,727 28,071 27,626 Social welfare costs 3,912 3,819 2,801 2,785 Other retirement benefit costs 9,155 7,836 7,264 5,859 Other compensation costs restructuring costs Total remuneration paid to employees 50,380 49,245 38,703 37,133 Employee costs charged to Income Statement 39,970 40,413 29,921 30,296 Employee costs capitalised 10,410 8,832 8,782 6,837 Total remuneration paid to employees 50,380 49,245 38,703 37, Other Operating Costs Employee costs (note 4) 39,370 40,413 Depreciation of non-current assets (note 14) 30,752 30,819 Amortisation of grant (note 17) (3,072) (3,072) Operations and maintenance 44,893 35,083 Impairment of intangible assets (note 12) 7,116 7,925 Total 119, , Interest And Other Income, and Finance Costs Interest income: Interest income on deposits Finance costs: Bank loans and overdrafts made to the company 18,074 19,115 Net pension scheme interest (note 23) Total finance costs 18,677 19,548 The Group is exposed to interest rate risk as it borrows funds at floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and through the use of interest rate swap contracts. EirGrid plc Annual Report 2016 Page 94

19 7. East-West Interconnector Operations Due to the significance of the East-West Interconnector (EWIC) linking the electricity grids in Ireland and Great Britain, the impact of EWIC on the Income Statement has been presented in separate columns on the face of the Income Statement. The EWIC is currently out of commission due to a fault that occurred when the Interconnector was being returned to service following the annual maintenance outage on 8 September, The Directors are satisfied, through the combination of vendor warranties and the insurance programme in place, that the EWIC will return to service by the end of December Revenue for the EWIC for the financial year comprised the financial year regulated tariff of 19.3m (2015: 38.1m). The remainder of revenue in respect of the EWIC relates to auction receipts totalling 13.0m (2015: 22.8m) and also income from provision of other system services 10.4m (2015: 9.9m). Auction receipts are a revenue stream for the Group arising from the operation of the EWIC whereby capacity is sold on the interconnector. Auction receipts form part of the determination of regulatory over recoveries which are returned in future periods. The 2016 tariff rate anticipated auction receipts being 2.7m (2015: 3.7m). The financial year Profit Before Tax for EWIC operations was 3.4m (2015: 32.2m). In line with normal practice any regulatory over recovery arising in the financial year will be returned to consumers in a later tariff period and has not been provided for in the financial statements. EirGrid plc Annual Report 2016 Page 95

20 8. Profit Before Taxation The profit before taxation is stated after charging/(crediting) the following: Depreciation (note 14) 30,752 30,819 Amortisation of grant (note 17) (3,072) (3,072) Operating lease rentals 3,286 3,050 Foreign exchange loss/(gain) 5,286 (3,003) Aggregate emoluments paid to or receivable by directors in respect of qualifying services are as follows: for services as a Director for Executive Director services Total Aggregate contributions paid, treated as paid or payable during the financial year to a retirement benefit scheme in respect of qualifying services of directors: - defined benefit schemes (for Executive Director) There is only one Director (the Chief Executive) in a pension scheme. This is a defined benefit scheme. Auditor s remuneration in respect of the financial year is analysed as follows: Group audit of group companies other assurance services tax advisory services other non-audit services Company audit of individual company accounts other assurance services tax advisory services other non-audit services 16 - EirGrid plc Annual Report 2016 Page 96